Are share buybacks a matter of substance or a fashion Essay

Are share buybacks a matter of substance or a fashion - Essay Example A company has to get authority from its shareholders in order to buy back its shares. Usually this is done at its Annual General Meeting. Secondly, and far less common, a company can announce a tender offer. This involves all shareholders submitting a price they would be prepared to accept for their shares. In both instances once the company buy backs the shares it will cancel them, so they will cease to exist. Therefore a company cannot flog the same shares back onto the market at a later date. A company exists to allocate its resources in the most efficient manner for the benefit of its shareholders. Part of its resources may be surplus cash. Surplus cash is cash that it does not require to maintain or expand its business. It may decide to return this cash to its investors. This can be done either by a dividend or by buying back its shares. The decision as to which method is used usually depends on complex taxation issues that we can happily leave to the companys accountants. In recent years there has been increased pressure from investment institutions for companies to return their surplus cash rather than sitting on it just in case they might need it for future acquisitions. The institutions argue that it should be their decision, and not the companys, to hold part of their assets in cash. As a general rule, share buybacks are good for shareholders. The laws of supply and demand would suggest that with fewer shares on the market, the share price would tend to rise. Although the company will see a fall in profits because it will no longer receive interest on the cash, this is more than made up for by the reduction in the number of shares. In effect you get more pie, as although the total size of the pie is reduced this is more than offset by the fact that you get a bigger slice’1. ‘The popularity of share buybacks has catapulted over the past twenty years. In the United States alone, corporate